MAXIN ADVISORS Weekly Market Review adresses the issues of the moment and our views for the markets ahead.
The US debt spiral
Many months ago we highlighted the risks of a public debt spiral in countries like the US, France or Italy following years of budgetary imbalances, counter-cyclical tax cuts and the massive fiscal stimuluses implemented during the COVID-19 period.
Last Friday, the US National debt hit a record high of USD 33 Trillion according to data from the Treasury Department. The precise figure of USD 33’044’858’730.468.04 is 54 % higher than it was 5 years ago and a trillion more than it was in June of this year, only two months ago.
The accumulation of budget deficits and corresponding public debt at a time of sharply rising interest rates is creating a dangerous dynamic of debt spiral where the cost of servicing the stock of debt is growing exponentially and now surpassing the primary deficit consisting of tax receipts and expenditures.
With economies potentially slowing down ahead, projections of tax receipts are dire while most expenditures, and the financial cost of the debt keep rising.
The issue has become a major political subject. The growing national debt is the centrepiece of a looming clash between the Biden Administration and Republicans in Congress and we are facing a Government shutdown in the coming weeks if a highly divided Congress, and an even more divided Republican Party fail to pass a budget.
The US debt spiral is a complex issue that has significant implications for the country’s economy and future generations. The case of the US is particularly important considering the TOTAL size of the outstanding debt on one hand and the fact that a large portion of it is held by foreigners.
For decades, the US has enjoyed the privilege of being the best credit and the lender of last resort. Unfortunately, the recent developments of its debt dynamics has led rating agencies to downgrade the US as a prime lender.
In this article, we will delve into the basics of national debt, factors contributing to the debt spiral, and historical trends in US debt.
The debt spiral refers to a situation where the national debt, including the accrued interest, grows at an exponential and unsustainable rate, putting a strain on the country’s economy and future prospects.
A Historical Overview of US Debt
The 20th century witnessed significant fluctuations in US debt levels, reflecting the various economic and political events that shaped the nation. One prominent example is the aftermath of World War I, where the debt increased substantially to finance war-related expenses. The government had to borrow heavily to support its military efforts and provide aid to its allies.
However, the 1920s brought a period of economic growth and prudent fiscal policies, which helped reduce the debt-to-GDP ratio. The nation experienced a boom in industries such as manufacturing and construction, leading to increased tax revenues and a stronger economy. This allowed the government to pay down some of its debt and alleviate the burden on future generations.
The Great Depression, which began with the stock market crash in 1929, had a profound impact on US debt levels. As the economy spiraled into a severe downturn, the government implemented various programs under President Franklin D. Roosevelt’s New Deal to stimulate economic recovery. These initiatives required significant government spending, resulting in a sharp increase in the debt-to-GDP ratio.
The trend of increasing debt continued during World War II when the government borrowed heavily to fund the war effort. The nation mobilized its resources to support the military, resulting in a surge in government spending and a corresponding rise in debt levels. This period marked a significant turning point in US debt, as the country’s involvement in the war necessitated substantial financial resources.
In recent years, US debt has continued to climb steadily, raising concerns about its long-term sustainability.
Several factors have contributed to this growth, including expansionary fiscal policies, increased healthcare costs, and the impact of the 2008 financial crisis.
Following the 2008 financial crisis, the government implemented various measures to stabilize the economy and prevent a complete collapse. These actions, such as bailouts and stimulus packages, required substantial government spending, leading to a significant increase in debt levels.
Additionally, rising healthcare costs have put pressure on the federal budget, contributing to the growth in national debt. As medical advancements and an aging population drive up healthcare expenses, the government has had to allocate more resources to healthcare programs, further straining the nation’s finances.
Factors Contributing to the Debt Spiral
Several factors contribute to the US debt spiral.
One major factor is the persistent budget deficits, where the government’s spending exceeds its revenue in a given fiscal year. These deficits result in increased borrowing and accumulation of national debt.
Budget deficits arise due to a variety of reasons. Economic downturns, increased government spending, and tax cuts are some of the factors that contribute to budget deficits. While running budget deficits may be necessary in certain situations, they exacerbate the debt spiral if not ultimately compensated by periods of budget surpluses.
In Keynesian economic theory, Government should use budget deficits to stimulate economic activity at times of economic downturns, and then run budget surpluses and reduce their stocks of debt when economies are strong and tax receipts plentiful. Governments should run budget deficits and surpluses alternatively to smooth economic cycles while managing the debt burden carefully.
It is interesting to note in the chart above how the budget deficits increased in 2017, 2018 and 2019 despite strong economic conditions, low inflation and low interest rates. Donald Trump’s politically-motivated countercyclical tax cut of 2018 is a textbook example of fiscal mismanagement that has exacerbated the US debt problem.
Another contributing factor is the growing interest on the accumulated debt. As the debt increases, so does the interest payment burden. This interest payment not only puts pressure on the government’s budget but also diverts funds that could be used for essential services and investments.
Furthermore, changes in interest rates on the national debt can have a significant impact on the debt spiral. If interest rates rise sharply, as they have in the past two years, the cost of servicing the debt increases, making it even more challenging for the government to manage its finances effectively.
Moreover, the structure of the debt can also play a role in the debt spiral. For instance, if a significant portion of the debt is short-term and needs to be refinanced frequently, it can expose the country to higher interest rate risks and increase the vulnerability to market fluctuations. As we highlighted in recent publication on the subject, the US Treasury has been lax in managing the structure of its debt with the bulk of it being on short tenors, and therefore highly sensitive to rising interest rates.
By contrast, countries like Austria or Belgium used the zero to negative interest rate environment of the end of the 2010s to issue 100 and 150 year bonds at almost zero percent interest rates.
External factors such as global economic conditions and geopolitical events can also contribute to the debt spiral. Economic recessions or financial crises usually lead to decreased tax revenues and increased government spending, further exacerbating the debt problem.
As the European and American economies face a potential slowdown ahead, tax receipts may be declining sharply, exacerbating budget deficits.
Wars are also a major drain on public finances. It’s is estimated that the 20-years US military presence in Afghanistan has costed the US taxpayers a cumulative USD 8 trillion. Since the war in Ukraine began, the Biden administration and the U.S. Congress have directed more than $75 billion in assistance through humanitarian, financial, and military support.
The dynamics at play are indicative of a dangerous debt spiral in the US.
. Persistent and large budget deficits are making the public debt explode upwards. The total US public debt is now at USD 33 Trillion, three times higher than in 2010.
. The sharpest rise in interest rates in 40 years is having an oversized effect on the cost of servicing the debt.
The Federal Reserve kept the target range for the federal funds rate at a 22-year high of 5.25%-5.5% at its September 2023 meeting last week. Assuming an average interest rate of 3.5 % considering the heavy concentration of the US debt in short tenures, the interest paid on the US 33 trillion of public debt will probably exceed 1.15 Trillion in 2024, having more than doubled since 2021. Moreover, it is now as high as the primary deficit and will exceed it markedly in the years ahead.
. The US debt to GDP has more than doubled since 2009 and will exceed 130 % in 2023
. Government Spending is surging
. At the same time, and despite the relative strength of the US economy, Tax receipts are declining
Reducing Government Spending or Increasing Taxes ?
The only ways to contain the looming debt spiral are to either reduce Government spending, a major demand from the Republican Party in the current budgetary discussions or to raise taxes.
Government spending plays a crucial role in the functioning of a country’s economy. It encompasses various categories, each with its own impact on the nation’s financial health and overall well-being.
As the following graph from the US CBO, in 2022, total outlays represented USD 6.3 Trillion or 25.1 % of GDP of which the bulk consisted of Social Security (1.2 Trillion ), Medicare (747 Bln. ) and Medicaid ( 582 Bln.).
Defense represented another 751 Billion.
Unfortunately, the two most significant components of government spending, defense expenditure and social programs like Social Security and Medicare are usually extremely difficult to reduce.
Defense expenditure is considered essential for maintaining national security and protecting a country’s interests. It includes funding for the military, intelligence agencies, and defense research and development.
While a strong defense is necessary, excessive military spending can strain the budget and contribute to the debt spiral. and as we have seen above, this component is rising sharply
As the following graph shows, defense expenditures are increasing sharply having risen by 33 % since 2018, and is likely to continue rising as America faces two considerable military and geopolitical challenges ahead : Russia and China.
For the first time since WW2, in 2023, America is confronted with real or perceived military threats not from one, but from the two most powerful military nations of the world.
Social programs, such as Social Security and Medicare aim to provide financial support and healthcare services to the elderly, disabled, and low-income individuals. They are extremely sensitive politically.
As the population ages and healthcare costs continue to rise, expenditures on social programs mechanically place a strain on the government’s finances. One approach to ensuring the long-term viability of social programs is through comprehensive reforms. This may involve adjusting eligibility criteria, exploring innovative funding mechanisms, and promoting preventive healthcare measures to reduce overall costs.
On the other hand, it is essential to consider the broader economic impact of social programs.
On the one hand, these expenditures do stimulate consumer spending, boost demand for healthcare services, and create employment opportunities in related sectors. By investing in social programs strategically, governments foster economic growth and improve the overall well-being of their citizens.
On the other hand cutting into these programs can have a significant impact on the economy at large through the same multiplier effect on consumption and jobs.
To put the debate in perspective, an unimaginable cut of 10 % of total expenditures would save the US treasury USD 630 Billion in outlays. That is only half the projected budget deficit and only half the cost of servicing the debt.
On the other side of the financial equation, raising taxes to the tune of USD 1.4 Trillion to balance the projected deficit would amount to an overall 28 % increase in global taxation overnight shaving 5.5 % of the US GDP.
America, like many European countries, have already entered a debt spiral that could get out of control if not handled immediately over programs that would impact both sides of the equation for years..
Hence the heated debate in a Congress that is extremely weak, leaving a limited number of hardline Lawmakers with an oversized influence. The risks of a lasting and devastating shutting down of Government in a highly sensitive political year ahead of next year’s prudential elections is unfortunately unreasonably high.
The Consequences of a Debt Spiral
Effects on Economic Growth
A high national debt usually have detrimental effects on economic growth. As more resources are allocated towards debt repayment and interest payments, there is less funding available for productive investments and job creation. This can lead to sluggish economic growth and limited opportunities for future generations.
One of the main problems of the US budgetary structure and debt spiral is that the increase in debt of the past decade has been used for paying day to day expenses rather than investments in infrastructure or productive investments. Running deficits and increasing debt to pay daily bills has never been a healthy financial model.
The US is now at a stage where the sharp increase in its stock of debt AND the sharp increase in the cost of that ballooning debt will soon hit a wall, with the Government being forced to either contain its expenditures, with a major negative impact on economic growth, or to raise taxes, the worst possible move at a time where the economy may be stalling.
Whichever way one looks at it, the debt and budgetary issues facing the US are detrimental to economic growth in the years ahead.
Implications for Future Generations
The burden of the debt spiral falls on future generations who will have to bear the consequences of unsustainable levels of debt. It can lead to reduced access to quality education, healthcare, and other essential services.
At the time of writing, with USD 33 Trillion of debt and a population of 334 million people, each American now shoulders a burden of USD 98’800 of public debt costing them USD 3’458 in interest payments every year. That represents 4.6 % of the median household income, a median income that has itself been in decline for the past three years while poverty rates have surged.
Investments in maintaining existing infrastructure and developing new infrastructure are also curtailed, with potentially significant impact on the future competitiveness of the US economy.
Could the debt spiral lead to a global loss of confidence ?
The US debt spiral has now reached a critical issue that warrants attention. High budget deficits and high interest rates have a compounding effect that will normally lead to a ballooning of the US financial obligations.
This ballooning debt can lead to a loss of confidence in the ability of the US to repay its debt with major consequences on the cost of financing its deficits on one hand, and a potential scare about the value of its currency on the other.
America has another twin problem : Its citizens have very low savings ratios and a large chunk of its public debt is held by foreign individuals or nations such as Japan or China.
Rating agencies have already started downgrading the US debt which has lost its AAA status, a first in the history of modern America.
A loss of confidence could lead those weak holders to dump US bonds and well as the US dollar.
As US Dollars have generally been used as the main component of foreign exchange reserves by Nations, it could well be replaced by Gold in the future, as we are already seeing with China.
When it comes to the US dollar, the following graph of the US dollar Index shows how we could see the future :
Beyond a short term rise towards 107, we see the DXY falling towards 93 / 94 at the beginning of 2024.
But what worries us the most is that, if nothing is done to contain the US debt spiral, after a rebound in the following couple of years we could end up with a DXY index trading at 75 by the beginning of the next decade.
MAXIN ADVISORS Weekly Market Review 24 Sep 2023
Japan Holds Rates, Signals No Rush to Tighten Policy
The Bank of Japan (BoJ) maintained its key short-term interest rate at -0.1% and that of 10-year bond yields at around 0% in its September meeting by unanimous vote. The central bank also left unchanged an allowance band of 50bps set on either side of the yield target, as well as a cap of 1.0% adopted in July. The BoJ mentioned that it would patiently continue with monetary easing and respond to development in economic activity, the dynamics of prices, and financial conditions, amid extremely high uncertainties at home and abroad. By doing so, the board aims to achieve a price stability target of 2% in a sustainable manner, accompanied by wage increases. The committee reiterated it will take extra easing measures if needed while being aware of rising inflation expectations. In a recent interview with a local newspaper, Governor Kazuo Ueda hinted that an end to negative interest rates could come sooner than previously expected if supported by enough data on wage hikes.
Japan Inflation Rate Lowest in 3 Months
The annual inflation rate in Japan edged down to 3.2% in August 2023 from 3.3% in the prior month, pointing to the lowest reading in three months. Prices continued to rise for food (8.6% vs 8.8% in July), housing (1.1% vs 1.1%), furniture & household utensils (7.1% vs 8.4%), transport (3.3% vs 2.2%), clothes (4.4% vs 4.1%), medical care (2.4% vs 2.2%), education (1.3% vs 1.3%), culture & recreation (5.0% vs 4.8%), and miscellaneous (1.7% vs 1.2%). In contrast, prices of fuel, light, and water charges fell much faster, decreasing for the seventh month in a row (-12.3% vs -9.6%), mainly due to electricity (-20.9% vs -16.6%) and gas (-9.5% vs -5.3%). Meantime, core inflation was unchanged at a four-month low of 3.1%, slightly above market consensus of 3.0% while staying outside the Bank of Japan’s 2% target for the 17th month. On a monthly basis, consumer prices rose by 0.2%, easing from a 0.4% gain in July which was the steepest increase in three months.
Japan Service Sector Growth Eases to 8-Month Low
The au Jibun Bank Japan Services PMI declined to 53.3 in September 2023 from August’s three-month high of 54.3, a flash reading showed. It was the 13th consecutive month of growth in the service sector and the softest pace since January, as new business eased while foreign demand fell for the first time in 13 months. Meanwhile, employment fell for the second time in the past three months, with the rate of job shedding the strongest seen since January 2022. Backlogs of work declined after rising in the previous month. On the cost side, input and output cost inflation eased. Lastly, sentiment weakened to the softest since March 2022.
Japan Manufacturing Shrinks at Steeper Pace
The au Jibun Bank Japan Manufacturing PMI decreased to 48.6 in September 2023 from 49.6 in the previous month, below market forecasts of 49.9, indicating the fourth straight month of fall in factory activity and the steepest drop since February, preliminary estimates showed. Both output and new orders shrank the most in seven months, with export orders falling faster. Meanwhile, employment rose sharper while backlogs of work dropped the most since March. Delivery times lengthened for the second consecutive month, although at a softer rate. On the pricing front, input price inflation accelerated to a four-month high, while output price increased at the same pace as in the prior month. Finally, sentiment remained positive.
US Private Sector Stagnates in September
The S&P Global US Composite PMI came in at 50.1 in September 2023, slightly down from 50.2 in August, indicating a broad stagnation in activity across the private sector, a preliminary estimate showed. This marks the fourth consecutive month of declining PMI and signaled the weakest overall performance since February. Service sector growth eased to an eight-month low, while manufacturing output continued to contract due to high interest rates and persistent inflationary pressure. Total inflows of new business declined the most since December 2022, and outstanding business dropped at the sharpest rate since May 2020. Meanwhile, the rate of job creation accelerated to its fastest pace since May. On the price front, input cost inflation quickened to its highest level since June, while the rate of charge inflation was among the slowest seen in three years. Finally, business confidence dipped to a nine-month low.
US Services Activity Expands the Least in 8 Months
The S&P Global US Services PMI fell to 50.2 in September 2023 from 50.5 in August, below market expectations of 50.6, preliminary estimates showed. It was the slowest rise in business activity in the current eight-month sequence of growth. Service sector firms saw a solid decrease in new business, following pressure on customer purchasing power from high inflation and interest rate hikes. A renewed fall in service sector new export orders led to another marginal decrease in total foreign client demand. Meanwhile, the pace of increase in staffing numbers accelerated. Finally, service providers were at their least optimistic in 2023 so far as strain on disposable incomes worsened
US Services Activity Expands the Least in 8 Months
The S&P Global US Services PMI fell to 50.2 in September 2023 from 50.5 in August, below market expectations of 50.6, preliminary estimates showed. It was the slowest rise in business activity in the current eight-month sequence of growth. Service sector firms saw a solid decrease in new business, following pressure on customer purchasing power from high inflation and interest rate hikes. A renewed fall in service sector new export orders led to another marginal decrease in total foreign client demand. Meanwhile, the pace of increase in staffing numbers accelerated. Finally, service providers were at their least optimistic in 2023 so far as strain on disposable incomes worsened.
Canada Retail Sales Seen Dropping in August
Retail sales in Canada are expected to have contracted by 0.3% from the previous month in August of 2023, according to a preliminary estimate. Considering July, retail sales advanced by 0.3%, accelerating from the 0.1% increase in the previous month but revised lower from the preliminary estimate of a 0.4% advance. July’s retail activity was considerably higher for food and beverages (1.3%), amid large sales turnover in supermarkets and grocery stores (1.5%). Consumer demand was also robust for general merchandise (1.8%), and clothing (1.5%). On the other hand, retail fell for the first time in four months for motor vehicles and parts dealers (-1.6%) and at gasoline stations (-0.7%). The survey also found that approximately 17% of retailers were affected by port strikes in British Columbia. On a yearly basis, retail grew by 2%.
Euro Area Services Activity Contracts for 2nd Month
The HCOB Eurozone Services PMI edged higher to 48.4 in September of 2023 from 47.9 in the previous month, marking the second consecutive contraction in services activity so far this year, albeit at a slower pace than that from August. The decline was led by the sharpest contraction in new business since the start of the pandemic, suggesting that higher interest rates from the ECB are being transmitted to a greater extent. The aggressive decline drove services output to decline for a second month, despite another period of lower backlogs of work. Still, service employment edged higher. In the meantime, rising wages and fuel costs drove input inflation to continue rising at a considerable pace, although increased competition drove output charge growth to ease to a 25-month low. Looking forward, confidence for service providers waned, but remained in the positive territory.
Eurozone Private Sector Activity Contraction Eases Slightly
The HCOB Eurozone Composite PMI rose to 47.1 in September 2023, a marginal increase from August’s 34-month low, and it slightly surpassed market expectations of 46.5, a preliminary estimate showed. However, the latest PMI reading still indicated a significant monthly decline in business activity at the end of the third quarter, primarily driven by a steep contraction in the manufacturing sector. Meanwhile, the rate of decline in services activity eased slightly. Total inflows of new orders decreased the most since November 2020, and backlogs of work experienced the largest decline since June 2020, while the rate of job creation was the joint second-slowest in the current 32-month sequence of growth. On the cost front, input price inflation accelerated to a four-month high, and selling prices rose the least since February 2021. Finally, business sentiment dipped to its lowest level since November of last year.
Germany Factory Activity Remains Weak
The HCOB Germany Manufacturing PMI edged higher to 39.8 in September of 2023 from 39.1 in August, slightly above market forecasts of 39.5, according to preliminary estimates. Still, the reading continued to point to a deep contraction in the manufacturing sector, with production falling the most since May 2020 amid low demand. New orders continued to fall particularly sharply, although the rate of decline was the weakest for three months. Meanwhile, workforce numbers fell slightly for the third month running and factory gate charges decreased for the fourth month and at the joint-quickest rate since September 2009. Also, purchasing costs fell the least since April. Finally, business sentiment weakened further.
French Factory Activity Shrinks Most Since 2020
The HCOB France Manufacturing PMI shrank to 43.6 in September 2023, compared to August’s and market expectations of 46, a preliminary estimate showed. It marked the eight consecutive month of contraction and was the sharpest since May 2020, as factory output fell to its strongest rate in over three years amid worsening demand conditions. Moreover, backlogs of work fell for the second straight month, with the rate of depletion accelerating to its steepest in nearly three years. Similarly, factory job creation contracted to its largest pace since August 2020. On prices, input costs decreased for the fourth successive month, while output charges declined at a slower rate. Lastly, although still optimistic on balance, sentiments of French manufacturers deteriorated.
France Services PMI Lowest since 2020
The S&P Global France Services PMI fell to 43.9 in September 2023, below market forecasts and August’s figure of 46, preliminary estimates showed. This marked the fourth straight month of contraction and the steepest fall since November 2020. Business activity dropped to the greatest extent in nearly three years due to weak demand conditions. Meanwhile, there was an expansion in employment as services companies continued to hire more workers. On the price front, input inflation accelerated to a four-month high while output price inflation eased. Finally, firms remained optimistic towards the next 12 months.
Spain Q2 GDP Growth Revised Higher
Spain’s quarterly economic growth was revised slightly upwards to 0.5% on quarter in the second quarter of 2023, compared to the preliminary estimate of 0.4% and following an upwardly revised 0.6% rise in the previous quarter. Robust domestic demand more than offset a significant deterioration in external demand, with notable support coming from fixed investment (+1.9% vs +3.1% in Q1), especially housing investment (+3.6% vs +1.6%) and household consumption (+0.9% vs 0.3%). At the same time, government spending rebounded (+1.6% vs -0.5%). Conversely, net external demand had a negative impact on the GDP, as exports slumped by 3.1% and imports declined at a softer rate of 2%. On a yearly basis, the GDP rose 2.2%, also surpassing an earlier estimate of 1.8%, but slowing from a 4.2% growth in the prior period. Meanwhile, the Bank of Spain warned that it expects a gradual slowdown, with growth of 0.3% in Q3, and full-year expansion of 2.3%.
UK Private Sector Activity Falls the Most in 2-1/2 Years
The S&P Global/CIPS United Kingdom Composite PMI dropped to 46.8 in September 2023, down from August’s 48.6 and below the market consensus of 48.7, a preliminary estimate showed. This marked the fastest reduction in private sector output since the lockdown period in January 2021, driven by a continued contraction in manufacturing output and the steepest decline in service sector activity in 32 months. Apart from pandemic disruptions, the latest decrease in activity was the sharpest since March 2009, resulting from weakened demand due to cost-of-living pressures and higher borrowing costs. Total new work decreased for the third consecutive month, and employment numbers fell sharply. Apart from the pandemic lockdown months, this decline was the steepest since October 2009. On the price front, input cost inflation was the lowest since January 2021, and the rate of price increases charged was the weakest in over two-and-a-half years. Finally, business confidence fell to a nine-month low.
UK Services PMI Falls More than Expected
The S&P Global/CIPS UK Services PMI fell to 47.2 in September of 2023 from 49.5 in the previous month, well below expectations of 49.2, pointing to the second consecutive and sharpest contraction in the British services sector since January of 2021. New work for service providers sank at the sharpest pace in ten months, with companies citing rising economic uncertainty, elevated interest rates, and constraints on non-essential spending both from domestic and foreign customers. Consequently, output contracted despite another month of reduction in backlogs of work. The poor business conditions drove firms to shed employment for the first time this year, aiming to ease budget limitations. On the price front, higher wages drove input inflation to remain robust, although increased competition limited the pass-on to output charges. Looking forward, companies remained confident for business conditions over the next year, albeit at a slowing pace.
Ukraine GDP Expands by 19.5%
Ukraine’s gross domestic product increased by 19.5% from the previous year in the second quarter of 2023, the highest on record, as the base year started to include the impact of the Russian invasion of Ukraine in late February 2022. The result signaled that the Ukrainian war-torn economy started to slowly recover from the invasion, trimming the 37.2% plunge from the second quarter of the previous year. Major economic hubs towards the western part of the country, which are more distant from recurring military hotspots in eastern territories, have increased economic activity amid attempts to somewhat return to normalcy. Additionally, increasing efforts to boost grain exports have also contributed to the GDP. On the quarter, the Ukrainian GDP expanded by 0.8%.
The Week Ahead
Next week, all eyes will be focused on the US personal outlays and income report, with particular anticipation surrounding the release of the PCE price index. It is expected that core PCE prices have risen by 0.2% in August, the same pace as in July; while the annual rate, which is considered the Federal Reserve’s preferred gauge of inflation, is expected to have eased to 3.8%, marking its lowest point since June 2021. The report is also poised to reveal a 0.5% increase in consumer spending and a 0.4% gain in income for the same period. In addition, investors will closely monitor August’s durable goods orders, as well as the final readings on second-quarter GDP growth and September’s Michigan consumer sentiment. Moreover, the housing market will come under scrutiny, with a focus on Case-Shiller home prices, new and pending home sales figures. Additionally, market watchers will keep a close eye on advance estimates of wholesale inventories, the goods trade balance, CB consumer confidence, the Chicago Fed National Activity Index, and the Dallas Fed Manufacturing Index. Other significant events across the Americas include the release of Canada’s monthly GDP figures, and updates on Mexico’s unemployment and foreign trade data.
In Europe, all eyes will turn to the flash CPI report from the Eurozone, Germany, France, Italy, and Spain. The annual inflation rate in the Euro Area is expected to slow for the fifth consecutive month to 4.5% in September, the lowest since October 2021 but still well above the ECB’s 2% target. In Germany, a sharp drop in headline inflation to 4.6% is expected mainly due to lower external costs. On the other hand, in France, inflation is expected to accelerate slightly to 5%. Additionally, for Germany, the Ifo Business Climate indicator is expected to decline for the fifth consecutive month to its lowest level since October 2022, while the GfK Consumer Climate Indicator is likely unchanged from September’s four-month low. On a brighter note, German retail sales probably rebounded marginally after two consecutive months of falls. Other data to follow includes the Euro Area’s business survey, Germany’s unemployment rate, Italy’s consumer and business survey, France’s jobless data and consumer morale, Switzerland’s KOF Leading indicators, and Turkey’s business confidence. The United Kingdom will publish the final estimate of second-quarter GDP growth, alongside current account, Bank of England’s monetary indicators, CBI distributive trades, and Nationwide house price index.
In Asia, a week will be headlined by minutes from the Bank of Japan’s latest policy meeting, offering insights on the timeline for the central bank’s potential pivot away from ultra-loose monetary policy, in addition to potential support for the yen. Other data from Japan includes industrial production, retail sales, and the unemployment rate for August. In India, alI eyes will be on the current account for the second quarter. Also, South Korea will divulge business and consumer confidence for September. Elsewhere, the Bank of Thailand will hold another monetary policy decision, while Singapore’s inflation rate is expected to ease. In Australia, the monthly inflation rate is expected to rebound for the first time since April, pressuring recent holds from the RBA. Retail sales and batch of Aussie credit data are also eyed, while New Zealand will release forward-looking confidence indicators.
Our Market Views in a few Charts
Still too early to go long, buying opportunity ahead
US 10-year Treasury yields have now reached 4.5% the highest since 2007 and are in the ultimate leg of the bull phase that started in October 2020 with a target at 4.71 % / 5 %.
US DOLLAR to rise towards 107 before peaking and falling towards 93 into 2024
The dollar index pared some gains to 105.58 on Friday, after PMI data for September showed a broad stagnation in total activity for the second month running. Service sector growth eased to an eight-month low and manufacturing output continued to contract due to high interest rates and persistent inflationary pressure.
The dollar index has now recorded its tenth consecutive week of strengthening, after the Federal Reserve signalled one more rate hike may be still on the table while the BOJ refrained from hiking rates. The Yen weakened to below 148 per dollar, the lowest since early November and the pound fell to $1.227, the lowest level since March, after the BoE decided to keep rates unchanged, defying expectations of a rate hike.
The Yuan is a BUY
GLOBAL EQUITIES confirmed their August Peak and are now all in downtrends
US EQUITIES in confirmed bear trends
All three major US stocks indexed finished at their lowest on Friday with the Dow Jones losing 1.7%, and the S&P 500 and the Nasdaq declining 2.8% and 3.6%, respectively on the week. Technology and AI stocks were sharply lower and most sectorial index are now in bear trends.
This week’s close confirms the August peak of the Bear market Rally and we are agitating the 3rd leg of the C wave of the bear market that started in January 2022 and should bottom in the first half of 2024.
EUROPEAN EQUITIES are finally Breaking down
The German DAX lost more than 2% this week, the most since mid-August on worries over higher-for-longer rates. The benchmark Stoxx 600 fell 1.6% during the week dragged by construction and material stocks while tech shares rose. A series of PMI surveys showed that Eurozone business activity continued to contract at a significant pace in September, with new orders declining the most in nearly three years. Among single stocks, Dutch banks ING Groep NV and ABN AMRO Bank NV dropped 6.4% and 4.5%, respectively, after a majority of the Dutch parliament’s second chamber approved a proposal to increase bank taxes.
HERMES has its worst week in many months finally breaking down from its lengthy summer consolidation.
Insurance is topping out with TALENX falling 11 % a the management took advantage of the stellar rise in the stock price to announce a capital increase.
FERRARI is also breaking down while VOLKSWAGEN is bottoming out on short covering,
JAPANESE EQUITIES are peaking
Japanese equities ended the week sharply lower despite the BOJ decision not to hike rates in the face of weakening PMIs and a stable inflation rate.
CHINESE EQUITIES in bottoming process but still too early to go all-in
Chinese equities ended the week sharply higher on better economic news and announcements that China would lift the cap on foreign ownership. However, there is one more downdraft to be had before a major entry point in October 2023.
CRYPTO CURRENCIES in bear phase
OIL has peaked for now and a new down leg may be starting
GOLD AND SILVER in bottoming process
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